Single Mother Plans To Shape Up Finances

PERSONAL FINANCE - MONEY MAKEOVER

At 28 years of age, Karen Warner often feels overwhelmed. A single mother with a 4-year-old son, she has found it difficult to face the realities of her finances.

''When my charge cards were maxed out I knew that I couldn't do this forever,'' she said. ''I charged my electric bills a couple of times and my house payment . . . I was spending money that I didn't have.''

Karen owes $4,253 in credit-card debt, $10,770 for a 1990 Ford Probe automobile, and $47,000 on a home in Orlando. Nevertheless, she wants to save money so that her son, Bradley, may attend college one day.

''I have never really been disciplined with my money,'' she said. ''I guess I have never seen the light at the end of the tunnel.''

Selma Eisen, a Longwood financial planner with Variable Investment Plans Inc., recently worked with Karen to help her gain a better grasp of her financial future.

By following a strict budget that allows for little frivolous consumption, Karen can work her way out of debt within three years, Eisen said, and begin saving for Bradley's education.

''She gets frustrated thinking that she doesn't have money,'' Eisen said. ''I am going to tell her that that is not unusual.''

Indeed, Karen's plight is a common one - she tried to shop her blues away.

''When I got laid off, I got real depressed,'' said Warner, who spent a year out of work before landing a job as a secretary with Real Estate Research Consultants in Orlando.

''So just to feel like I wasn't broke, I would go out and charge something to prove to myself that I still had money,'' she said.

But Karen's management of that money is what will ultimately determine whether her future is dominated by debt, or open to creating wealth.

''I think she is a very determined young lady, and I think she is very responsible,'' she said. ''But I think this debt is driving her crazy.''

The solution?

Eisen has called for a rigid budget that spans four years. First, Eisen examined Karen's expenses, which total $1,628 a month.

Karen's mortgage payment is $463. She could lighten her monthly load by refinancing her automobile loan, Eisen said.

She suggested a refinanced loan for four years at 10 percent interest. That would reduce Warner's car payment from almost $380 a month to $253. Her current interest rate is about 13 percent.

Expenses can be cut further if consumption sacrifices are made for staples such as electricity and telephone.

For example, fewer long-distance phone calls can reduce Karen's monthly phone bills from an average of $50 to an average of about $35 a month, Eisen said. Likewise, an energy audit of her home can lead to a net monthly savings of about $30.

Assuming a monthly bank service charge of $17 a month, monthly food expenses of $150, monthly clothing expenses of $25, and monthly transportation expenses of $120 a month, Karen can then afford a health insurance program for her and Bradley at about $145 a month.

Eisen also suggested Karen may want to start saving $20 a month to use for gifts during the upcoming holiday season.

''I mean this is a strict budget,'' Eisen said.

Karen's tax bracket is in the 17 percent range, giving her a net monthly income of $1,732, which leaves her with a net disposable monthly income of $104.

''She is going to have to work,'' Eisen said.

Karen said she plans to look for part-time job opportunities available during the holidays, or she may seek jobs that she can perform on the weekends when Bradley is visiting his father.

But she said her biggest challenge may be raising the level of discipline in her life.

''My parents, they gave me everything that I ever wanted or needed, so I never had a sense of discipline,'' Karen said.

The self-restraint could pay dividends. By Eisen's calculations, Karen will be able to pay off her credit-card debt within two years if she works at least 16 extra hours each month and uses the $3,120 she currently uses to pay for child care toward her debts.

''In year two, she is not going to have day care because her boy will be in school,'' Eisen said.

At the end of year three, if Karen invests $6,125 - day-care funds plus money she saved from her discretionary income - at an average annual return of 7.5 percent for the next 11 years, she can have $13,570 saved up her son's education.

In year four, Karen will be able to pay off her car and then begin planning for retirement, Eisen said.

Karen should be more aggressive in analyzing her taxes, said Celita Davis, owner of Financial Directions Inc., a financial planning firm in Maitland.

As a working parent, Karen is eligible to take advantage of child-care tax credits, as well as credits that come with being classified as ''head of the household.'' Likewise, earned income credits allow low-income taxpayers such as Karen to receive cash from the government regardless of tax liability.